Blonch

Income – the Forgotten Asset

Most folks think of insurance for protecting assets. A commonly overlooked asset is the ability to earn a living. Your income stream may be your most valuable asset. Interestingly, the younger you are the more valuable it is, since when you are older, although your annual income may be higher, you don’t have as many years of earnings still to come.

Short-Term, Long-term

Disability Insurance or Disability Income (either referred to as DI) protects your income in the event you are injured and unable to work. This is what the duck sells on TV. Since the most common injuries are things you can recover from in a fairly short time, some people prefer to “self-insure” that short-term loss of income by having personal savings set aside. They buy insurance only for long-term disability, which is the most catastrophic financial loss and the least frequent to happen (perfect conditions for insurance and the law of large numbers). This is easily done since policies are sold with a “waiting period” for benefits to start. Think of it as a deductible. Longer waiting periods have lower premiums.

My employer gives Short-Term Disability (STD) insurance at no cost to the employee and Long-Term Disability (LTD) is available in our group plan at a subsidized rate and with no individual underwriting. The STD plan pays after a week off from work, but only up to six months of disability. The LTD plan has a six-month waiting period, and pays until age 65. LTD rates for young people are higher than rates for older folks at the same income level.

Definitions Matter

There is no standard DI policy, so be careful of the differences between policies from different companies. For example, it matters how they define being disabled. Some policies require you to be unable to work (“any” work), while others only require you to be unable to work in your occupation (called “own oc”). When my wife’s gynecologist accidentally injured his hand cutting firewood, he retired from surgery taking disability income because his policy had “own occupation” in the definition of disability. He needs fine motor control in that hand for surgery and can no longer perform that work, but there are a lot of jobs he could still do if he had to.

How much is enough?

When you buy disability insurance, you may have choices as to how much of your income to insure. Insurance companies aren’t willing to create a moral hazard by insuring you for all or more than you could earn. Since insurance benefits can be tax free if you don’t deduct cost of the premiums (I am not your tax consultant, so plan with them about this, not me) you shouldn’t need 100% of your income. Benefits levels between 50% – 80% of your current income level are fairly common, as are adjustments (reductions) for any other benefits you may be eligible for. While your normal living expenses may be reduced during disability (you don’t have to drive to work, for example), also consider the added costs of modifying your housing and transportation to accommodate your disability.

Adjustments

With long-term disability insurance you want to protect against future inflation with a cost-of-living adjustment (COLA) to benefits. Similarly, you will want to adjust your base benefit level from time to time. Some policies allow you to upgrade that base every three years, based on your most recent earnings.

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Insurance by PecosJack